Transcript Recap: the Hobbesian dilemma

Markets
Recap: the Hobbesian
dilemma

Coercive solution to the problem of order
has two problems

Logical inconsistency

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Why would rational egoists surrender their sovereignty in
the state of nature?
Empirically dubious

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
Too expensive
Too oppressive
Central authority may not exist
Two ways out of the
Hobbesian dilemma

Reject self-interested behavioral assumptions

If people are not rational egoists, then no war or all
against all: cooperation easier to attain


Then we’re back to the Individuals section. But, as we
have seen, those theories also have their weaknesses.
Reject the conclusion that rational egoists
produce a war of all against all

Instead, rational egoists can live in peace
A fundamental question

Is it possible for self-interested
individuals to produce an orderly society
without an external authority?
Hayek on order
Order exists when people are able to
form accurate expectations
Two sources – and types – of
order

Taxis = ‘made orders’


Produced by human design (e.g.
Hierarchies as discussed in the last section,
includes organizations)
Kosmos = ‘spontaneous orders’

Orderly structures that are the product of
the interaction of many people, but are not
the product of human design (e.g.
Markets)
Kosmos vs.
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Complex




Not limited to what a
human mind can
master
Abstract

Taxis


Perception requires
mental
reconstruction
Has no particular
purpose
Simple
Concrete


Complexity limited to
what a human mind
can master
Its existence can be
intuitive, perceived
by perception
Serves the purpose
of the maker(s)
What will a spontaneous order
look like?


Hard to predict
Depends on

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Characteristics of the environment
Initial position of the elements
Rules governing behavior of the elements
Differences between rules in planned
and spontaneous orders

Rules in planned orders (e.g.
organizations)


Are for the performance of assigned tasks (e.g.
bureaucratic rules)
Rules in spontaneous orders


Are independent of purpose
Affect a very large, but indeterminate, number of
persons
Hayek: Draw the theory
Predictable patterns
of behavior
Individual
preferences
Individual behavior
consistent with
preferences
Hayek’s theory


Hayek argues that self-interested
individuals can produce a world of
stable expectations
But is this world necessarily
cooperative?

Does self-interested action lead people to
behave in ways that contribute to group
welfare?
Thomas Schelling
Schelling’s residential segregation
model



Shows that people who have a very mild
preference for living with their own kind (a
bit more than 1/3 of their neighbors)– and
no preference to live in a segregated
neighborhood – are likely to create
segregated neighborhoods
This outcome is NOT intended by anyone
Without a norm or a law (against racism),
segregation a likely outcome
Schelling

Schelling’s work suggests that the
interaction of self-interested individuals
does not necessarily produce outcomes
that contribute to group welfare
Schelling: Draw the theory
Segregation
Preference for some
neighbors similar to self
Individual stays/
moves
Adam Smith (1723-1790)
Smith

Argued that rational egoists can create
social order (not just coordination, but
also cooperation)
Smith’s principal behavioral
assumption

People are self-interested
Wall Street

Illustrates the radicalism of the
assumption of rational egoism

However, the lesson of Wall Street is
Darwinian – not Smithian


Gekko's aim is to produce the fittest firms
Smith's aim is to produce economic growth for
society as a whole.
Implications of this
assumption

Man’s self-interest  a propensity to
truck, barter, and exchange one thing
for another

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Exchange improves individual welfare
This propensity critical for social order

Social order produced in societies having
institutions that foster economic
development – thus increasing wealth.
Why economic development
leads to social order

When most people are poor, they
cannot be happy. An increase in wealth
increases well-being.

E.g. ‘a rising tide raises all boats’
A paradox? Hobbes versus
Smith

Hobbes and Smith both start from the
same rational egoistic behavioral
assumption

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Hobbes: there will be a war of all against
all
Smith: selfish people can cooperate in
producing greater wealth
How can they reach such opposing
conclusions from the same premises?
Zero-sum versus positive-sum
games

For Hobbes, social interaction is zero-sum


In a zero-sum game, resources are fixed
E.g. dividing up a birthday cake
Zero-sum versus positive-sum
games, cont’d
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For Smith, social interaction is positive-sum


In a positive-sum game, resources are expanding;
specialization  greater production
Moreover, exchange  individual welfare
 Both parties to an exchange are better off
afterward than they were before:

Unless there is deception or a misunderstanding of the
facts, a voluntary exchange must make both parties better
off. Even though no additional goods are produced by the
act of trading, the welfare of society is increased because
each individual acquires goods that are more suited to his
or her desires
The division of labor


Why does Smith see the world as a
positive sum game?
Because, when people specialize, they
can produce more wealth than if they
tried to produce everything by
themselves
Example: pin-making


By himself, each man can produce from
1 to 20 pins a day
By dividing pin-making into 18 different
operations, each man can produce 4800
pins a day
Origins of the division of labor

Slight differences in natural talents in
different people – the principle of
comparative advantage

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Self-interest leads to specialization in the
presence of comparative advantage
And specialization leads to greater
productivity

a self-reinforcing system
Specialization  exchange

With the division of labor, people no
longer produce what they want to
consume themselves.

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Workers in the pin factory cannot live on
pins; they need food, clothing, etc.
Specialization can only occur if there is
some mechanism by which workers
producing pins could exchange their
wares with workers producing food and
clothing
Smith summary

Unlike Hobbes, Smith sees social
interaction as a positive sum game in
which people gain from exchange
Free trade  Wealth
Wealth  Contentment and willingness to
comply
Compliance  Social order
A spontaneous order

Man’s interest in exchange leads him ‘to
promote an end which was no part of
his intentions’
Smith: Draw the theory
Wealth
Propensity to
truck and
barter (selfinterest)
Specialization
& exchange
Content,
willing to
cooperate
Social order
Individual
cooperation
Smith

How do we know if the theory has
merit?

Look at the empirical world
Implications of Smith’s theory for
policy

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Economic growth (and, hence, social order) is
best assured by promoting free as against
regulated markets (e.g. laissez-faire)
The doctrine known as liberalism holds that

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Collusion between producers is socially harmful
Tariffs and other government imposed barriers to
trade are socially harmful
Government policies that encourage monopolies
(common in Europe during Smith’s lifetime) are
socially harmful

e.g. US Sherman Anti-Trust act
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Findings of law against Microsoft
The minimal state
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Smith’s arguments justify a minimal (‘nightwatchman’) state which

Protects citizens against violence, theft and fraud,
enforces contracts, etc.
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Object of government
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like a maintenance squad of a factory; sees to it that the
mechanism which regulates production of goods and
services is kept in working order (Hayek 232).
Not a strong state that intervenes much more
directly in the economy
Similar arguments used to advocate anarchy as a
viable solution to the problem of order
Questions about Smith’s
theory

Distributional issues

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Class – a source of disorder ?
Exchange – and even the division of labor –
presuppose private property rights

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If private property rights can only be produced by the
state, then we are right back in Hobbes’ box
Social order also requires normative content
(Hayek)

Where does this come from in the theory?
Critique, cont’d

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By itself, Smith’s theory cannot explain
how rational egoists can cooperate in
establishing a state
Social order depends on both
spontaneous and planned orders – both
markets and governments (Hayek)
Robert Axelrod
Axelrod

In Smith’s world, why don’t people just
take what the other has to offer and
renege on their end of the deal?


Smith assumes the existence of a minimal
government
Axelrod suggests another possibility
The concept of equilibrium in
social science

Equilibrium = an outcome that
conforms to the (realistic) expectations
of its participants

E.g. a state of affairs in which no
participant can expect to increase his
welfare by changing his behavior
Cooperative and non-cooperative
equilibria

Cooperative equilibria provide optimal
welfare to participants

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Many social norms are cooperative equilibria
Non-cooperative equilibria provide
suboptimal welfare to participants

Ex: the Hobbesian state of nature
Cooperative equilibria are
problematic

We often end up with sub-optimal
equilibria

this is another way of talking about the
same old problem of social order
The prisoner’s dilemma (PD)

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There are a host of different social
situations that constitute sub-optimal
equilibria
The PD is a famous way of representing
what is common to all of these different
situations
PD, cont’d
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There are 2 players, designated
 Row
 Column
They have 2 choices
 Cooperate
 Defect
Each must choose simultaneously, without
knowing what the other will do
PD, cont’d

No matter what the other does,
defection produces a higher payoff than
cooperation

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This is known as the non-cooperative
equilibrium
The dilemma

If both players defect, both do worse than
if they had cooperated
PD, cont’d
Column player
Column player
Row player
Cooperate
Defect
Cooperate
R=3, R=3
S=0, T=5
Reward for mutual
cooperation
Sucker’s payoff, and
temptation to defect
T=5, S=0
P=1, P=1
Temptation to defect
and sucker’s payoff
Punishment for
mutual defection
Defect
PD, cont’d
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
It pays to defect if you think the other player
will cooperate (5>3)
But it also pays to defect if you think the
other player will defect (1>0)
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Thus, it is better to defect no matter what you
think the other player will do
And the same goes for the other player
So, if the players are rational egoists, then
both will defect
PD, cont’d
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If both players defect, then each gets 1
If both players cooperate, however,
then each gets 3
Since 3>1, mutual defection is a suboptimal equilibrium

E.g. both players would have been better
off if they had cooperated
Examples of sub-optimal
equilibria
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Overutilization of common pool
resources
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Overfishing
Overgrazing of common fields
Pollution from profit-making factories
(where the air is a common pool resource)
Proliferation of SUVs
Etc.
2 sources of sub-optimal
outcomes in the world

1. The PD

The structure of the PD specifies that
actors are rational egoists

If people were altruists, then their payoffs
would not be those in the PD game

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The highest payoff would be for cooperation
regardless of what the other player would choose
As a result, the cooperative equilibrium would be
much easier to attain
Sources of sub-optimality,
cont’d
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2. Coordination

If a game has two or more coordination equilibria,
even altruists can fail to produce cooperative
outcomes

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Ex: it doesn’t matter whether drivers use the right or
the left sides of the road, so long as everybody does
the same thing
Solution to coordination problems: conventions
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Self-enforcing, because no one has an incentive to
violate them
When conventions have distributional consequences,
they are difficult to arrive at (require bargaining)
Fundamental question

In situations with the characteristics of
a PD Game, is it possible for
cooperation to emerge without a central
control?
Axelrod’s solution
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The iterated PD
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Axelrod’s The Evolution of Cooperation
A PD computer tournament, with each player
using a strategy of his own choosing, competing
with all other strategies
Strategies included
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All C
All D
Random C, D, etc
Axelrod’s tournament
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Players were recruited from experts in game
theory from all disciplines and many different
countries
An indefinite number of 2-person PD games
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Each participant (= strategy) played against each
other
The winning strategy: Tit-for-Tat

Always cooperate on the first round; defect only
after the other player has defected
Requirements of the result
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Cooperation is based on reciprocity

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Mechanism = mutual retaliation
The ‘shadow of the future’ is important
enough to make this reciprocity stable
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A finite number of plays  unraveling of
cooperation

Not knowing the time of our death  an
indefinite number of plays of the game
Axelrod: Draw the theory
Iterated PD
Individual
anticipates the
future
Cooperative
equilibrium
Individual plays
tit-for-tat
Axelrod

How do we know if the theory has
merit?

Look at the empirical world
Trench warfare in WWI

TFT emerges on the battlefront
A possible implication of the
result

In the long run is it rational for rational
egoists to cooperate, and to establish
social order?

If so, then social order might arise even in
the absence of much government authority
Limitations of the analysis

It assumes the possibility of a durable
identity of the parties, and the
repetition of the circumstances of the
game

It assumes the possibility of an iterated
PD, but this condition was imposed by the
experimenter

This condition violates the description of the
Hobbesian state of nature (Pizzorno, in Bourdieu/Coleman)
Limitations, cont’d

It assumes that players continue to play
with one another indefinitely in the
future
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If the number of plays is determined in
advance, cooperation unravels

Implications of the fact that we do not know
the date of our death
Limitations, cont’d

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It is based on 2-person games, but social
order is an N-person game
Since reciprocity is the engine of the solution,
to sustain cooperation one must know
whether your partner cooperated or defected
during the last play of the game

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E.g. the solution requires monitoring capacity
Monitoring capacity is high in a 2-person game,
but low in an N-person game

Monitoring becomes too costly if N>25
Limitations, cont’d

It ignores social structure
Beyond two-person games

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Researchers across disciplines have
expanded beyond two person games
They look at systems with many actors
Relying on simple assumptions about
actors, they observe how interactions
produce macro-level patterns of
behavior
Swarms

The interactions of actors – whether
they be ants, locusts, or people – can
produce predictable patterns (Couzin)
Karl Polanyi
Polanyi’s historical critique of
invisible-hand solutions

The ‘double movement’ of market forces and
social protection
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Previous to market society

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Purpose of trade: to obtain goods not available on the
spot
Trade builds community and solidarity between trading
partners
In non-market society, individuals are not rational
egoists
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Maximize honor in tribal society
Potlatch
Kula Ring
Polanyi’s critique, cont’d

Rise of market society

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Purpose of trade: to acquire goods at minimal cost
Trade  antagonism between trading partners
The market  rational egoism  social
disorder
Polanyi, cont’d

Free market treats labor, land, and capital as
commodities

People resent being treated as commodities


Land subject to environmental degradation


Consequence: rise of state regulation of labor and
public health
Consequence: rise of state regulation of land (National
Park Service, etc.)
Economy subject to fluctuation


Consequence: rise of state financial regulation (central
banks)
protectionism
Polanyi, cont’d


Social legislation restricts the freedom
of the market
Similar legislation enacted at the same
time in countries with different



Economies
Political traditions
Ideologies
Polanyi
Empirical critique of the theory of
spontaneous order:
Both England and Prussia had freetrade policies, but replaced these
with increased regulations
(worker’s compensation, public
utilities, etc.)
Theoretical critique: social
order as a public good


Three types of goods
1. Public goods

Non-excludable


You can’t keep anyone from consuming them
Non-rival

Not subject to ‘crowding’: my consumption of them doesn’t
decrease your access to them
 ex: national defense
 Public parks
 Freeways
 Ocean fisheries
 The atmosphere
 Social order
Collective and private goods

2. Collective goods



Non-excludable for members of a given
group/society
Rival
3. Private goods


Fully excludable
Rival
The free-rider problem

Since public goods are non-excludable

Rational egoists will free-ride rather than
contribute to their production


Because they can consume the public good without
paying for it
The same holds for the members of groups
providing collective goods
Implications of the free-rider
hypothesis

Collective action (action in pursuit of
public/collective goods) is highly problematic

If it’s rational for me to free-ride, it’s rational for
you to do so

Hobbes revisited


If people desire social order and are rational, they will not
abide by the rule of law unless coerced to do so
Parallel with PD

Everyone will end up in the D/D box – especially because
they have large numbers – no way out of the state of
nature
Other examples

Rational egoists will not vote in
Presidential elections
Critiques of the invisible hand
solution to social order

Theoretical critique



Limits to Axelrod’s results
Due to the free-rider problem, exchange cannot
lead to collective action
Empirical critique

Laissez-faire governments everywhere subject
to increasing state regulation